Markets & Finance

S&P Raises Nokia to Buy from Avoid

December 17, 2002

Nokia (NOK): Upgrades to 5 STARS (buy) from 2 STARS (avoid)

Analyst: Ari Bensinger

Despite a weak market, Nokia has boosted its handset market share to a dominant 36%, more than its nearest three competitors combined. Unparalleled manufacturing scale and efficiency are significant Nokia competitive advantages. Its 22% handset operating margin (three times the nearest rival) helps produce a strong free-cash flow at an average clip of one billion euros per quarter. At 20 times S&P's 2003 earnings per share estimate of 81 cents, Nokia is near its lowest price-earnings level in more than five years. S&P would buy this market leader at notable discount to its fair value of $20 based on S&P's discounted cash-flow model.

Ambac Financial (ABK): Maintains 5 STARS (buy)

Analyst: Catherine Seifert

The shares are off a bit Wednesday after the major municipal bond insurer and financial guarantee company said it has guaranteed $600 million of asset-backed securities supported by home equity/manufactured housing loans that were issued by Conseco, which filed for Chapter 11 bankruptcy Wednesday. Ambac tells S&P that it is "comfortable" with these transactions, and that they are all performing. The bonds issued are all rated between AAA and AA. Moreover, these transactions represent less than 1% of Ambac's $98.5 billion structured finance portfolio at Sept. 30. Shares remain undervalued at 11 times S&P's 2003 operating earnings per share estimate of $5.25.

General Electric (GE ): Maintains 3 STARS (hold)

Analyst: Robert Friedman

GE agreed to buy Finland's Instrumentarium for $2.1 billion in cash. With shares trading at 16 times the 2002 operating earnings, S&P believes GE is paying full price for one of Europe's largest medical instrument makers. To justify the price, GE is counting on sustainable 20%-plus Instrumentarium sales growth as well as the benefits of bundling with GE Medical's medical diagnostic equipment offerings. With one billion in sales, Instrumentarium will boost GE Medical System segment's revenue by 10%-plus, but this is still less than 1% of a consolidated GE. S&P still values GE shares at $23-$31.

The cereal manufacturer reported November quarter earnings per share before special items of 77 cents vs. 63 cents, three cents above expectations. Results benefited from a solid, 3% gain in worldwide volume, cost savings, and lower interest expense. U.S. retail unit volumes grew 4%. Full-year results should benefit from improving volume trends and joint venture earnings. S&P is raising its fiscal 2003 (May) earnings per share estimate by a penny to $2.61. Shares are attractive at 16.3 times S&P's calendar 2003 earnings per share estimate of $2.75, in line with the price-earnings multiple for the S&P 500 Index and comparable peers, given its improving growth profile.

The company's nasal flu vaccine FluMist received recommendation from an FDA advisory committee for approval to prevent influenza in patients aged 5 through 49. The committee did not recommend FluMist in the 50 to 64 age group because of insufficient data to support efficacy. S&P expects formal FDA approval in time for the 2003 flu season. S&P also sees peak annual FluMist sales of $350 million by 2007, and estimates 2002's earnings per share of 40 cents; 2003's at 95 cents; and 2004's at $1.31. On an updated net present value and discounted-cash-flow analysis, shares are moderately undervalued.

Video game maker Activision said Tuesday night that results would be sharply lower than expectations. S&P is lowering its fiscal 2003 (March) and fiscal 2004 earnings per share estimates to 82 cents and 74 cents, from $1.38 and $1.52. S&P is concerned about a dramatic sales decline despite such Activision brands as Tony Hawk and Spiderman, as well as a potential rapid increase in its allowance for returns and doubtful accounts. However, with nearly $8.00 per share in net cash and securities, and at a discount enterprise value/sales ratio of 0.4, Activision shares are worth holding.